NS&I increases Premium Bond rate to 14-year high

The move comes after the Government-backed institution added £80 million to the prize pot towards the end of last year. 

National Savings and Investments (NS&I) will increase its Premium Bonds prize fund rate to 3.15% from the next prize draw in February.

This latest increase, which takes the fund rate to a 14 year high, comes after the savings institution added £80 million to its prize fund last month.

A bettered rate means that there are more valuable prizes to be won in next month’s draw.

Notably, there are three more prizes of £100,000 and six more prizes at £50,000. Meanwhile, there will be over 121,000 more £50 and £100 prizes each to be won. 

Despite this rate rise, the odds of winning some sort of prize remain unchanged at 24,000 to one.

This is partly due to fewer £25 winnings on offer, with NS&I set to cull these prizes by nearly 242,000 next month.

As interest rates continue to rise, more savers will begin to find that they risk exceeding their personal savings allowance for the year.

In essence, the personal savings allowance allows basic taxpayers to earn up to £1,000 a year in interest tax-free. Higher rate taxpayers can earn up to £500 a year while additional rate taxpayers have no personal savings allowance at all.

If you exceed your personal savings allowance, you could pay income tax rate on your interest. This all depends on several mitigating factors which are explained in our guide How are my savings taxed?

Nevertheless, if you are due to pay tax on your savings, Premium Bonds could be likened to ISAs for their tax-free appeal.

This is because prizes won from investing in Premium Bonds are tax-free, and won’t contribute towards your Personal Savings Allowance.

In addition to its Premium Bond prize fund rate, the Government-backed institution increased the rate on its Direct Saver, Income Bonds and Direct ISA accounts.

This is set to benefit more than 870,000 of its customers, according to NS&I.

Its Direct Saver and Income Bonds, which are similar to easy access accounts, now offer a rate of 2.60% AER and 2.63% AER respectively.

Still, these rates lag behind some of the other best easy access rates on the market. More information on these top rates can be found in our weekly savings roundup.

It is a similar story for the Direct ISA which, despite offering 2.15% AER, is some way behind Virgin Money’s Easy Access Cash ISA Exclusive Issue 2 and its rate of 3,00% AER.

However, the appeal of investing with NS&I might not lie with its rates but in part to its Government backing. For those with large sums of money, every penny of these deposits is backed by the Government if NS&I goes bust. Other providers don't warrant this protection, and are backed instead by the Financial Services Compensation Scheme (FSCS).

This means you can save up to £85,000 in other privately-owned providers and invest in NS&I, spreading the risk of losing your money.